Glossary

Accounts receivable management

This includes debtor bookkeeping, regular credit checks, dunning, and collection services. Accounts receivable management frequently requires a lot of time and personnel costs for a company; taking the responsibility for accounts receivable management is part of the services offered by the factor.

Asset Backed Securities (ABS)

With asset backed securities (ABS) financing, the receivables packages are sold to an especially created special purpose vehicle (SPV) which refinances the purchased receivables by issuing securities.

ABS Flex

Unlike classic ABS programs that place your securitized receivables packages on the capital market, Eurofactor ABS Flex is suitable for companies with a receivables volume of 10 million Euros and up. In addition, the central advantages of the flexible solution include much lower structuring costs, a much shorter implementation phase, greater flexibility during contract negotiations, and more flexible contract terms.

Asset Backed Financing

This type of financing is based on the sale of the receivables of a company. It can be used to improve liquidity as well as providing protection against bad debts.

Assignment credit

Short-term bank financing secured by assigning receivables to a credit institution. However, credit institutions normally accept domestic receivables only, and with high discounts.

Basel II

"Basel II" is a second consultation paper presented by the Basel committee for banking supervision in January 2001. This committee consists of representatives from the banking supervision agencies of the leading industrial nations (group of ten). The consultation paper contains recommendations for the reorganization of the world banking system.

Clients of the factor

Mainly medium-sized companies from over 30 industries with industrial customers; these can include manufacturers, wholesalers, and service providers.

Confidential / undisclosed factoring

With closed factoring, the debtor is not informed that the receivable has been assigned; the assignment of the receivable remains invisible to the debtor.

Collection

Collection of receivables; dunning + allocation collection services are part of accounts receivable management when factoring is used.

Credit insurance

Obtaining credit insurance also serves the purpose of protecting you against the risk of bad debts. Unlike the factor, the insurance company does not assume one hundred percent of the risk. Credit insurance premiums can be eliminated through cooperation with a factor.

Creditworthiness

The creditworthiness of business partners; continuous monitoring of debtor creditworthiness is part of the services offered by the factor. It is one of the criteria used to calculate factoring fees.

Debtor bookkeeping

Customer bookkeeping: Monitoring and recording payments, can be provided by the factor under a factoring contract.

Disclosed factoring

With disclosed factoring the debtor is informed regarding the assignement of receivables and future cooperation with the factor.

Dunning

Part of accounts receivable management; can be provided by the factor. Follow up of your balance

Equity capital

Equity or funds similar to equity invested into private companies by investment companies. (private equity)

Equity-to-assets ratio

Key performance figure for balance sheet analysis, where equity is compared to total assets.

Export or import factoring

Factoring for cross-border goods and services transactions where companies (exporters, importers) utilize the services of a factor. The factor either handles the transactions directly, or uses a cooperation partner in the respective country.

Factoring

Factoring is the purchase of short-term receivables resulting from the delivery of goods and services. Factoring is used for short-term sales financing and one hundred percent protection against bad debts.

Factoring with recourse

The factor is able to hold the factoring client liable if the debtor is unable to pay.

Factoring without recourse

The factor has no recourse against the customer, that is, the factor assumes the full risk of bad debts in case of default by the debtor.

Financing

Unlike credit financing with a fixed agreed credit limit, liquidity depends on the company's sales when factoring is used. Financing through factoring adapts to the increased liquidity requirements as sales rise (financing parallels sales). Therefore, fast sales growth does not result in liquidity gaps.

Forfaiting

Forfaiting is a form of export financing where a financial institution purchases medium to longer-term export receivables.

Insolvency

Permanent inability to meet financial obligations.

International cooperation

Factoring institutions frequently process international factoring transactions in cooperation with partners in the respective countries. There are two factoring cooperatives that operate globally: Factors Chain International (FCI) and International Factors Group (IFG).

International factoring

Factoring for cross-border goods and services transactions; also called export or import factoring depending on the location of the factoring customer. The factor either handles the transactions directly, or uses a cooperation partner in the respective country.

Leasing

Leasing is used to finance vehicles, machinery, and other mobile capital assets. The leased items remain the property of the lessor, while the lessee can use the items in exchange for regular lease payments.

Mezzanine financing

A mixed form of financing consisting of fully liable equity capital and external financing using a loan, which is usually secured as first-class debt.

New insolvency system

The new insolvency system came into effect in Germany on 01/01/1999. It further restricts the security interests of banks and savings institutions for credit extended by them. Due to the special nature of the factoring business, receivables financing by factoring institutions is not affected by the new insolvency system.

Ottawa convention

In 1998, the Ottawa convention regarding international factoring came into force in Germany. Its contents go far beyond the factoring business, since it standardizes and simplifies the assignment of receivables for cross-border goods and services transactions in general, and therefore makes export financing easier.

Outsourcing

Outsourcing individual business functions, economies of scale, utilization of specialized service providers; factoring makes it possible to outsource costly, personnel-intensive accounts receivable management.

Payments from the factor

The factor pays out up to 90 percent of the invoice amount when the invoice copies are submitted; the retention is credited or paid out at maturity under consideration of early payment discounts, rebates, and returns.

Private Equity

A type of equity capital that is provided as interim financing by an investment company.

Protection against bad debts

By purchasing the receivables, the factoring institution assumes the full risk of bad debts for domestic and cross-border business transactions. Advantages:

Rating

Before offering loans, credit institutions prepare an individual creditworthiness analysis for every company; this is called a rating. It is an index that identifies the likelihood that the company will default on its obligations.

Receivables

Unpaid invoices that negatively affect liquidity; from a business management point of view, unused capital that can easily be activated through factoring. (liquidity)

Retention

Used by the factor to reconcile rebates, any kind of dilution , early payment discounts, and possible deductions for deficiencies by debtors; it consists of 10 to 20 percent of the purchased receivables and is credited or paid out at maturity.

Risk assumption

Important service provided by factoring; unlike credit insurance companies, the factor assumes up to one hundred percent of the risk without recourse; therefore the factor bears the full risk of bad debts in case of insolvency of a customer, without requiring any special proof.

Risk of bad debts

The risk of partial or complete loss of a receivable due to the default of a customer (debtor). The factor assumes up to one hundred percent of the risk of bad debts, without recourse.

Services provided by the factor

3 Kinds : Collection, Credit insurance, Financing. 
Includes all of accounts receivable management and other services, e.g. information regarding debtor payment habits.

Trade indemnity

Liability for partial or total loss of a receivable caused by the default of a client (del credere). Default is deemed to have occurred after an established period of time without special proof if the client has not paid and not disputed the debt. (protection against bad debts)